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Suppliers need to diligently monitor their customers, and their contracts with them, for signs of looming insolvency, so the supplier can act before they lose the right to do so under the Corporate Insolvency and Governance Act 2020, which, includes, taking away suppliers’ rights in commercial contracts to terminate a contract for non-payment if a customer is insolvent.
The aim of the new law is to help companies carry on trading despite their insolvency, so they have a better chance of recovering, selling the business, or at least maximising the amounts available for creditors.
But the new law also mean that suppliers who have not been paid for goods or services already supplied will no longer be able to treat their contract as ended once the customer is insolvent, and refuse to supply further goods or services until they are paid. Instead, they must continue to supply their (now insolvent) customer, provided the customer pays for the new goods and/or services.
Nor is the supplier allowed to do ‘any other thing’ on grounds the customer is insolvent. This could include changing payment terms because of an insolvency, or exercising any other right that applies on an insolvency.
A customer is insolvent if they have entered into an administration, administrative receivership, approval of a company voluntary arrangement, liquidation or a provisional liquidation. There is also an insolvency if two new processes have occurred – a moratorium, or a convening order under a restructuring plan – under new law that applied from 26 June 2020.
There are certain financial services exemptions and, until the end of September 2020, if the supplier is a ‘small entity’ the new regime is excluded. To qualify it must, in its most recent financial year, satisfy at least two of the following (unless it is in its first year of trading, when different thresholds apply):
A supplier can also ask, the customer to terminate with consent, or a court to terminate the contract if it can show it suffered ‘hardship’ because of the new provisions, but this is not defined and will, no doubt, be a high hurdle to overcome.
The law does not prevent termination on the basis of a pre-insolvency act, provided termination occurs prior to the commencement of the relevant insolvency procedure and this may lead to encouraging suppliers to terminate sooner than they would otherwise have done. It also does not prevent the customer or administrator/liquidator to terminate a contract, should there be the option to do so, nor prevent a liquidator from terminating an unprofitable contract by disclaimer as an onerous contract.
Whilst the change in law matters, as suppliers can be required to continue to supply, despite no guarantee of payment, it does not apply where an event of termination takes place after commencement of the relevant insolvency procedure. Therefore, if the supplier is not paid, or a non-monetary event of termination applies, during the insolvency period, then the supplier could then terminate.
In light of the above, it is good practice to regularly review the financial standing of customers and take decisive action when an event of termination arises and there is a possibility insolvency will follow, especially in the economic climate we now find ourselves in.
August 17, 2020
Richard is a Partner and Solicitors in the Company and Commercial department.